Friday, March 30, 2012

Bullish It

OK, so I decided to do a substantive post – something I haven’t done in a while because this blog has fallen into the category where, if I have the time and energy to do this, then I also have the time and energy to do something more useful, so the only times I would be inclined to post are when I’m too busy or tired to do so. But OK, let’s say that this is useful sort of the way it was useful for my old roommate to fly back to England now and then so that he could maintain residency. After all, it seemed earlier today that Google might have revoked my visa. (For now I’ll table the question of whether the benefits of being a Blogger resident are comparable to those of being a UK resident.)

So, as the first word of the title suggests, I’m fairly optimistic about the US economy right now – where “optimistic” means I think there’s a genuine recovery going on and that it is likely to continue for at least several more months, not that I think things are going well in an absolute sense. (I mean, does anyone think things are going well in an absolute sense?) So I am more of a Smithian than a Smithist.

But another post to which I was referred by the Bearish Smith’s blog leads me to think about the issue of macroeconomics as a field. It seems (especially from the comment thread) that the Old Keynesians and the New Monetarists are at each other’s throats (but, interestingly, the newly christened Market Monetarists – who have some claim to being the legitimate intellectual heirs of the Old Monetarists – basically seem to be on the same side as the Old Keynesians on the major issues here; and the New Keynesians can break for either side depending on whether they’re more Keynesian or more New). Obviously I’m more sympathetic to the Old Keynesians than the New Monetarists, otherwise maybe my pseudonym would be “dsge” instead of “knzn.”

Here’s my take: to begin with, economics is basically bulls**t. I mean, it’s necessary bulls**t, sometimes even useful bulls**t, but I’m extremely skeptical of people who think economics is a science or that it could be a science. We have to make policy decisions (and investment decisions and personal consumption decisions etc.), and we have to have some basis for making them. We could just use intuition, and we often do, but it’s helpful to use logical thought and empirical data also, and systematic study using fields like economics can help us to clarify our intuition, our logical arguments, and our interpretation of the empirical data. The same way that bulls**t discussions that don’t make any pretense at being science can help.

Economics is bulls**t because it relies on the premise that human beings behave in a systematic way, and they don’t. Once you have done enough research to convince yourself that they behave in a certain way, they will change and start behaving in another way. Particularly if they read your research and realize that you’re trying to manipulate them by expecting them to continue behaving the way they have. But even if they don’t read your research, they may change the way they behave just because the zeitgeist changes – cultural sunspots, if you will.

The last paragraph may vaguely remind you of the Lucas critique. Lucas basically said that macroeconomics (as it was being practiced at the time) was bulls**t, but he held out the hope that it could receive micro-foundations that wouldn’t be bulls**t. The problem with Lucas’ argument, though, is that microeconomics is also bulls**t. And Noah Smith, writing some 36 years after the Lucas critique and observing its unwholesome results, takes it one step further by saying, if I may paraphrase, “Yes, the microeconomics upon which modern macro has now been founded is indeed bulls**t, but if we do the micro right, then we can come up with non-bulls**t macro.”

Yeah, I doubt it. Maybe we can come up with slightly better macro than what we’ve got now, but the underlying micro is never going to be right. Experimental results involving human subjects are inevitably subject to the micro version of the Lucas critique: once the results become well-known, they become part of a new environment that determines a new set of behavior. And the zeitgeist will screw with them also. And so on. And in any case, even if the results were robust, I’m skeptical that we can really build them into a macro model or that it would be worth the trouble even if we could. Economics will always be bulls**t.

Now there’s a case for doing rigorous bulls**t, at least as a potentially useful exercise. That’s what I think DSGE modeling is: it’s a potentially useful exercise in rigorous bulls**t. And I don’t begrudge the work of people like Steve Williamson: I think there's some rigorous bulls**t there that may be worth talking about. But in general, when it comes to bulls**t, there is not a monotonic relationship between rigor and usefulness. And to put all your eggs in the rigorous bulls**t basket – not only that, but in one particular type of rigorous bulls**t basket, because rigor does not live by rational equilibrium alone – is something that not even Pudd’nhead Wilson could advocate.

So I’m going to stick with sloppy Old Keynesian models as my main mode of macroeconomic analysis. They’re bulls**t. They’re not rigorous bulls**t. But as bulls**t goes, they’re pretty useful. A lot more useful than unaided intuition. And they’re easy enough to understand that we can have a reasonable idea of where their unrealistic assumptions are likely to lead us astray. Of course all economic models have unrealistic assumptions, but hopefully our intuition allows us to correct for that condition when applying the models to the real world. If the model is too complicated for the typical economist to understand how the assumptions generate the conclusions, then the unrealism becomes a real problem.

UPDATE: At the risk of making him guilty by association, I want to point to a post by Chris Dillow, where he makes a related point that is perhaps the point I would have tried to make if I had been in a less obnoxious mood.

UPDATE2: Noah Smith replies, defending economics as being (at least potentially) scientific. I'll concede that economics can have scientific elements (as, indeed, politics or warfare can have scientific elements), but I think those elements will always be relatively small and unimportant, whereas bulls**t will always be critical to the field.

140 comments:

1) Particularly if they read your research and realize that you’re trying to manipulate them by expecting them to continue behaving the way they have.

Dostoevski articulated this first (and in a more interesting way), certainly in "Notes from Underground" and likely (though I've forgotten lo, these many decades later) in the Bros. K.

2) You may need a new term, after Harry Frankfurt's treatise. It's clear, to me at least, that many macro types (e.g., Cochrane, Fama, Mankiw) treat macro as BS in just the way that Frankfort described BS, but I don't think that you mean it that way, and I think that, much like the recently established definition of "santorum" has become the dominant one in many people's minds, so has Frankfort's definition for BS.

When I was in my 20's I interviewed two dozen successful business people from very different markets and varied backgrounds. Some had worked themselves up from extreme poverty, others born with the pulverable silver spoon.

I focused on how they made business decisions and surprisingly they all said the same thing; after reading business proposals and discussions with internal and external experts, the decision to go forward or pass....came down to a gut decision.

I have been reading econ blogs for about a year now, and I must say that this is the most convincing piece I have read so far.

Economics sounds like religion, and economists like preachers debating their version of the dogma. After a very short while, the sensible person gets really turned off by all their ridiculous debates about the fine points for which they can bring zero evidence.

For an interesting book about the use of models, see "Science in the age of computer simulation" by Eric Winsberg.

When you refer to the fact modelling affects behaviour, you are referring to Heisenberg's Uncertainty Principle. Before you go making generalizations about "economics vs science", you should make sure you have defined science at all, rather than making what might seem to be self evident assumptions about it.

I would reject the premise of this post simply because it seems to assume the problems inherent to economic modelling have been resolved in more readily quantifiable science; they most certainly have not. The innaccuracy of economic models might just seem more blatant because it affects us so directly.

In physics, Heisenberg's uncertainty principle is quantifiable and consistent. In economics, the processes we are studying take place in a time frame wider than the time frame in which intellectual progress takes place, so we can't quantify the ways in which that progress will fail.

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